Oil and gas output slumps in Algeria

11 July 2013

Algeria’s hydrocarbons sector is in decline and the government’s failure to make the most of its greatest asset is beginning to have an impact on the economy

Despite being a significant resource holder and producer of both oil and gas, Algeria’s global position as a hydrocarbons exporter is declining by almost every measure. If this decline continues, the country will face an increasing squeeze on its balance of payments and its fiscal balance. But for now, the government seems inclined to do little about it.

At the end of 2012, Algeria had proven oil reserves of 12.2 billion barrels, according to the 2013 BP Statistical Review of World Energy. That means it has the fourth largest hydrocarbons reserves in Africa – after Libya, Nigeria and Angola – and the eighth largest in the Middle East and North Afric (Mena) region. Its oil production is the third largest in Africa – after only Libya and Angola – and the eight largest in the Mena region.

Its abundance of gas is similarly impressive. Algeria’s gas reserves of 4.5 trillion cubic metres are second only to Nigeria in Africa, and are the fifth-largest in the Middle East, after Iran, Qatar, Saudi Arabia and the UAE. It produces more gas than any other African nation, and has the fourth largest output in the Middle East, after Iran, Qatar and Saudi Arabia.

Output falls

That, however, is where the good news ends. Taken in a historical perspective, Algeria is underperforming on virtually every metric. In 2005, its then energy minister, Chakib Khelil, announced a huge programme to dramatically increase oil and gas production. In fact, the opposite has happened. Oil production has fallen 16.2 per cent from 2 million barrels a day (b/d) in 2005 to 1.7 million b/d in 2012. Gas output has dropped by 7.6 per cent over the same period, from 88.2 billion cubic metres in 2005 to 81.5 billion cubic metres last year.

If this decline continues, [Algeria] will face an increasing squeeze on its balance of payments

Algeria was once deservedly proud of its position in the gas exports market. It was responsible for the first ever commercial liquefied natural gas (LNG) sale. By the early 2000s, it had established itself as the third largest LNG trader in the world behind Indonesia and Malaysia. But its LNG exports have fallen from 25.75 billion cubic metres in 2005 to just 15.3 billion cubic metres in 2012, a remarkable drop of 40.6 per cent.

Piped gas export volumes were more or less stable over the same period, slipping only slightly from 35.1 billion cubic metres in 2004 to 34.8 billion cubic metres in 2012. The majority of Algeria’s piped gas is bought by Spain and Italy. The opening of the Medgaz pipeline in 2012 resulted in an increase of piped gas to Spain, from 7.5 billion cubic metres in 2004 to 10.2 billion cubic metres in 2012, but the 2.7 billion cubic metre upturn is dwarfed by the pipeline’s 8 billion cubic metres a year (cm/y) capacity.

While piped gas exports to Spain increased, those to Italy declined by a similar margin, from 23.6 billion cubic metres in 2004 to 20.6 billion cubic metres in 2012.

Algeria’s two largest gas trading partners are also taking considerably less LNG than before. LNG sales to Spain fell from 6.6 billion cubic metres in 2004 to 3.6 billion cubic metres in 2012, while Italy’s fell from 2.1 billion cubic metres to 1 billion cubic metres. Exports to France fell too, while those to the US and Belgium disappeared completely.

Aside from the increase in pipeline exports to Spain, some of this decline can be attributed to the economic downturn in Europe and the collapse of the US gas market that resulted from the country’s discovery of large amounts of shale gas. The bottom has fallen out of the market for all would-be exporters of gas to the US. The Henry Hub gas price, the main trading point for the US market, dropped a massive $6 between 2005 and 2012, from $8.8 a million BTU to $2.8 a million BTU, a fall of almost 70 per cent.

LNG rerouted

In response, some of Algeria’s LNG has been rerouted. The greatest increase has been to Turkey, with sales rising from 3.2 billion cubic metres in 2004 to 4.1 billion cubic metres in 2012. Turkey looks set to remain an important trading partner in the future. In January, the two countries agreed to extend a long-term gas supply agreement originally signed in 1988. The deal, which was due to expire in 2014, has been extended by 10 years. It covers exports of up to 4 billion cm/y, with the possibility of an increase in volumes by mutual consent.

Algeria LNG exports (Billion cubic metres)
Other Europe0.550.8
South Korea0.30.0
Source: BP 

The only other European country to have taken more Algerian gas is the UK. The UK was not an importer from Algeria in 2004, but received a modest 0.1 billion cubic metres in 2012. More significant were the diversions to Asia. China, India and Japan – none of them importers of Algerian gas eight years ago – took just under 1 billion cubic metres of gas in 2012. None of this, though, has been enough to make up for the decline in other markets.

The story in Algeria’s domestic market is markedly different. Failure to increase local gas prices even slightly towards the market price has led to a rampant increase in local demand. The domestic gas price is no more than about $0.5 a million BTU. Between 2005 and 2012, while Algeria’s gas production was declining, local consumption increased by a third, from 23.2 billion cubic metres to 30.9 billion cubic metres. Oil consumption increased by almost 50 per cent over the same period, from 250,000 b/d in 2005 to 367,000 b/d.

Production declines

Algeria is doing little to increase hydrocarbons output in line with rising consumption. Upstream exploration in recent years has been a disaster. The government has held three international licensing rounds since 2005, but failed to attract bids for about 75 per cent of the licences on offer.

Exploration work is under way in a relatively new tight gas province in the southwest. According to the Paris-based International Energy Agency, five fields – Touat, Timmimoun, Reggane North, Ahnet and Ain Tsila – will yield a total of 16.7 billion cubic metres by the time they come on stream in 2016/17.

But most of this work is already delayed, and analysts estimate that even this new output will do nothing more than compensate for declining production elsewhere and cover rising local demand. It is the same story in the oil sector, where the bulk of output is from ageing fields now on the decline.

Earlier this year, the government introduced amendments to the hydrocarbons law that it promised would improve the attractiveness of Algeria’s upstream market to international energy companies. Under the amended law, companies will be taxed on profits rather than revenue, a change designed to make exploration on smaller fields more viable and to encourage further development. The new terms promise incentives to exploit resources that are more difficult to access.

But while parliament passed the amendments in January, the government has failed to follow up with another exploration round. There is also little evidence of excitement among the companies that the new terms are designed to attract. “Their upstream regime has failed,” says Jonathan Stern, senior research fellow at the Oxford Institute for Energy Studies in the UK. “They have tried to rejig it, but it hasn’t worked. The international petroleum community is deeply sceptical whether the terms are attractive.”

For the past two months, the incapacity of President Abdelaziz Bouteflika, who is recuperating in France after a stroke, has made progress even more unlikely. It would be optimistic to believe that a new round will be launched before the next presidential elections, which are scheduled for April 2014. Although, they may be brought forward if Bouteflika fails to make a significant recovery. “The whole country is in policy paralysis,” says Stern.

There is the occasional bright spot. Even though proven gas reserves have remained static since 2002, almost a billion barrels of oil reserves have been added, bringing the total up to 12.2 billion barrels in 2012, from 11.3 billion barrels in 2002. There has also been an increase in the number of active rigs, which increased from 30 in the third quarter of 2011 to 44 a year later, according to Opec.

Bold claims

But this is not enough to turn the fortunes of Algeria’s oil and gas sector into a good news story. The government continues to make bold claims about its hydrocarbons plans. In late 2012, state energy company Sonatrach said it planned to invest $80bn in oil and gas projects in the next five years. The plans include $15bn of spending in 2013, up from $10bn in 2012.

According to the Sonatrach statement, the focus of the spending will be on the “renewal of oil and gas reserves”, with an increase in the number of exploration concessions to 79 in 2014 from 57 in 2012. The plans also include a $14bn investment in five new refineries, with a combined capacity of 30 million tonnes a year.

Whether these plans can be realised remains to be seen. When it comes to refineries, it will be impressive if they can get any of the projects off the ground. A facility has been proposed at one of the locations, Tiaret, since 2005, but has still failed to come to fruition.

As the oil and gas sector stagnates, Algeria’s failure to make the most of its greatest asset is beginning to have an impact on the economy. The government has said that it will have to cut public spending in the future, and plans to drive down imports expenditure in order to avert a balance of payments crisis.

There is little indication that the oil and gas sector is going to come out of its slump any time soon. “There are plenty of reserves – both conventional and unconventional,” says Stern. “They may not be easy to access, but they’re there. The government just isn’t developing them. They’re not being squeezed out of global gas market. They’re squeezing themselves out.” 

Key fact

Algeria’s LNG exports have fallen 40.6 per cent in 2012 compared with 2005

Source: MEED

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